Saturday, January 10, 2015

Bespoke - 4Q14 earnings season begins Monday. I think that means an end to the US market pukage. After all, who wants to still be reallocating when earnings are coming in? And how much of a boost will companies get from the dropping oil price?

Reuters - SEC to investigate synthetic ETFs' effect on market volatility. Dear Mark Flannery: top of your list should be XIV, the short $VIX ETF. I love it a lot as a trading vehicle, but it's causing havoc in $VIX futures; and that affects the algos, and so you've got a massive positive feedback system that you need to check into. Plus, nobody else seems to have figured out exactly what the effect is.

[W]hen looking at the long leading indicators, all of them are moving in the right direction. Two of them: corporate bond yields and housing as a share of GDP, are a year or more out from their best readings, and so counsel some caution. I would like to see how housing fares in the Q4 GDP report issued later this month, but if this metric continues to move in the positive direction, then it is a safe bet that growth - including jobs and wages - will continue throughout 2015. Depending on what happens with governments' contributions (as set forth just above), my expectation is for YoY growth in 2015 to be approximately equal to its 2014 levels. If gas prices remain low, and housing picks up soon enough due to lower interest rates, then this may be the best year of the expansion yet.

Personally, I think oil drop to $30 and stay there, which means at least 1.5% added to US GDP, mostly into the hands of people with the highest marginal propensity to consume. This is massive and people aren't paying attention.

FT Alphaville - floating storage for oil is back. Commodity traders are buying tankers to store oil at sea. Sorry guys, that's not going to end well: oil is going to drop to $30 and stay there.

At $40 a barrel, around 1.5 million barrels per day (bpd) are cash-negative, located mostly in oil sands projects in Canada, WoodMackenzie said after analyzing 2,222 oil fields which account for the majority of global production.

"Being cash negative simply means that the production is more costly than the price received. This does not necessarily mean that production will be halted," Robert Plummer, Corporate Research Analyst for Wood Mackenzie, said.

The first response is usually to store oil produced in the hope that the oil can be sold when the price recovers, while the decision to halt production is complex and often costly.

"There is no guarantee these volumes would be shut-in. Operators may prefer to continue producing oil at a loss rather than stop production - especially for large projects such as oil sands and mature fields in the North Sea."

And if production doesn't drop significantly at $40, the price will drop to $30: we already saw this with gold, didn't we?

Reuters - Alberta leader warns of sustained deficit. And now we get to watch that right-wing economic miracle of Alberta collapse like a house of cards built on oil revenues. You're not morally superior, guys: you just got lucky for a couple years. So how are you going to deal with a $15 billion dollar annual budget deficit? That's worse than we have in Ontario, but with 30% of the population! Man, you guys suck. Oh well, at least it means your stupid Conservative Party disappears off the face of the earth. Maybe Harper can go back to writing propaganda for a think-tank, it's the only real job he's ever had in his life.

We’ll sign off with the simple point that unless a massive amount of new capital is transferred into bitcoin market sharpish — which is not impossible, since there are still a number of deep pocketed believers out there — it’s hard to imagine the asset class going any other way but south. Furthermore, it’s unlikely at this stage that either price rigging, mining cartels or lower energy costs will be able to reverse that trend.

Well, at least it'll be a learning experience for all involved. After all, you can't make money investing until you've learned how to lose money, right?

Friday, January 9, 2015

New Deal Demoncrat - the bottom in gas prices is close. Aw geez, he bases it on "inexorable seasonality". When will people realize that things can be different this time?

Project Syndicate - Europe's monetary lapse of reason. Even Joe Stiglitz is now mocking the Europeans for their austerity fixation. So how many Nobel laureates will it take before the Germans wise up? Well:

In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: the debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output. At least the International Monetary Fund has owned up to these intellectual and policy failures.

If the data unequivocally proves the EZ's strategy a failure, and yet they adhere to it, then the only reasonable conclusion to draw is that they never wanted to fix Greece's debt-to-GDP ratio. They wanted to destroy Greece.

Bloomberg Businessweek - Jim O'Neill on shitting BRICs. I dunno, Jim still thinks India has a good story. I wonder if he knows that their per capita productivity is still on par with Nigeria?

I can think of at least three basic reasons to be bullish on China: First, the collapse of crude oil prices will boost consumers' real incomes, helping them play a larger role in the economy.

Second, even though property prices have recently stalled and begun to fall, China will probably avoid a serious credit crunch, partly because Chinese policy makers have been more serious about restraining prices before they can collapse. Moreover, the price decline has made real estate affordable for more Chinese.

A third reason to be optimistic is the subdued nature of inflation in China. This allows for more accommodative monetary policy going forward.

Taken together, these factors will make it easier for China to rebalance its economy -- by raising wages, increasing property-ownership rights for urban migrants and reforming pension systems.

And he knows more than you, lad, so pay heed.

Reuters - Modi throws doors open to the Indian diaspora. Well, it's a great way to instantly boost your human capital. Then again, maybe he's doing this because he realizes he's not going to boost the human capital any other way.

FT beyond brics - hey, remember rare earths? That supposed critical rare earths deficit has worked itself out exactly how you'd expect it to. That is, how you'd expect it to if you knew the slightest damn thing about economics. How's that Molycorp position doing, by the way?

Mining.com - iron ore price about to get hit by a supply flood. This is bullish for the global economy. It's actually a bit bearish for India, since they had a lot of iron ore mining capacity that they wanted to bring back into production, but they won't be able to mine it at a profit now.

So since today seems to be a set-and-forget market day, let's go back and read through all of my Liberty Silver posts and remember that beautiful reminder of the old, heady days on the Vancouver Moss Isley Exchange.

I haven't been posting news this week, mostly because I've been disgusted with it.

Michael Shaoul noted that it's allocation season, and thus stocks have been selling off because hedgies are indiscriminately dumping last year's picks for this year's.

Brett Steenbarger followed up on this by noting that while the past week saw a lot of institutional selling, it's been mostly in institutional-held names. Now, he has a proprietary set of 100 mostly-insto-held stocks that he follows so he can see when they're being hit by heavy downtick selling. (He won't name the stocks, but I'm betting Norfolk Southern and CN are two of them - as well as probably any equity that correlates highly with HYG.) This week Steenbarger noted that while there was heavy insto selling, it wasn't being met by any broader selling, so that backs up Shaoul's thesis.

With all this in mind, the lamestream media has still blamed the recent downmoves on childish shit like Greece and rate hikes and the oil collapse.

Which means they have no damn clue and are just pulling explanations out of their asses.

So instead, I've assumed Shaoul and Steenbarger are right (Shaoul's identified insto allocation downmoves before), and watched stocks like NSC for clues as to when the selling stops. With that, I've assumed that this recent US market downmove wasn't going to turn into a compound waterfall: there's no reason for stocks to recover 2% today, for example, only to resume a downdraft, if insto season ends soon.

So yesterday, watching stocks, I was literally falling asleep from the lack of US equity excitement. The S&P didn't print a lower low, but nor did it print a negating high. Let me print a picture:

click to embiggen

But lack of excitement is also a possible sign that the insto selling was done, yet the broader market was waiting to make sure the coast is clear.

Then there's this view:

I didn't think the S&P would print an October-style crash low, because that was mostly driven by irrational fear of an Ebola epidemic in the USA. (Remember Sprott?)

With a 10% drop out of the picture, all I should expect is a ~5% drop. But should I wait a while to see if that chart punches through the lower Bollinger band again, like in mid-December?

I wasn't sure, but according to $VIX it didn't seem as likely:

Its failure to drop below 14 before popping again suggested that maybe the December selling and this week's selling were part of one and the same market action, but with a 2-week holiday in the middle.

So, with that in mind, yesterday I moved my VFV.to money over to HSU.to, which is a double-long S&P 500 ETF that tracks double the underlying very well (Horizons 2x long ETFs are great that way).

I also took a bit of profits in gold miners to move some money into HQU.to, a 2x long Nasdaq ETF.

The idea is, I like being long even in a downturn, because you never want to miss that 3% pop day in a bull market; but when the odds are in favour, I add leverage to make money on the retrace up from a low.

We'll see how this works out. From an economics perspective, you want to be long S&P right now because the low oil prices are going to provide a boost in the US. Every $10 drop in oil boosts their GDP by 0.2%, and I'm expecting oil to keep dropping to $30, not pop back to $70. The speculative premium still hasn't been wrung out: and as we goldbugs know from gold's crash, the price can fall one hell of a lot farther than is predicted by airy-fairy ivory-tower theories of supply and demand.

This'll boost US earnings, and thus even without any P/E expansion the US market can still go up this year (though maybe there's a long period of nasty horizontal churn coming as we get closer to the first US rate hike).

So there's no reason to be short US or neutral US right now.

So that's what I've been watching.

Meanwhile, GLD:UDN was >2SD up, and gold miners were >2SD up:

I don't have enough faith in the miners to expect them to continue >2SD for any length of time, even given the massive selloff that began in the fall.

So I'd not be surprised by at least a horizontal consolidation, if not a drop back down to the EMA(9): after all, this is the highest they've been over their EMA(9) since god knows when, and obviously gold sucks, right?

Then again, gold's just done some interesting things in other currencies. More later.

Wednesday, January 7, 2015

Liz Ann Sonders - again, will you quit piddling yourselves! In this issue, she also answers a lot of her investors' questions: a dropping oil price is unequivocally good for the US economy, the US market does go up strongly when the US dollar is increasing, and yes the market will still do well after the first Fed rate increase.

As an example, in the TSXV, there are probably 400 or 500 surplus companies in Canada. As my friend Otto Rock says, please don’t feed the animals. Don’t give these guys any more money. Make them go to company heaven.

And a swarthy fellow with a name that rhymes with "Blichael Blaoul" says the weakness in the US market is entirely the result of "the process of completing the 2014 allocation season". So, basically, "allocation season" means that amateur hedge fund clowns puke into an empty book for a few days so they can start anew, probably this time with the R2K and banking ETFs.

Hey Merkel! How's that glorious German economy doing? You know, with you being morally superior to the swarthy Medierraneans and all....

Oh.

So not that well, eh?

I'm sure the Germans will suddenly start making gentle cooing noises about stimulus spending now that their market has been puking for 6 months. Because, after all, they'll do whatever it takes for Germany, who cares about the rest of Europe, right?

He notes that the US market looked bad on Sunday, and guess what? It looks worse now.

Here's the SPY right now:

Yup, that's a rollover. And $VIX has popped over 20, $VVIX is 120, and hey look at this term chart from vixcentral:

Yup, it's inverting!

So OMG everything is horble, right?

Well, look at the above SPY chart, then look at this:

Yup, in Canadian dollars it doesn't look so bad. This might still just be setting up for a retest of the early December high. Hey, the mid-December puke doesn't even look that bad.

Hey, look at IWM:

Still no more than a retest of the breakout, so far. And here I was wanting to lighten up my position in XSU.to! Then I looked at the price and said "hey, that's not bad for a $VIX of 21! I think I'll hold."

So maybe the adults are back at their desks. But they're puking broad equities because they're scared of the USD pop, they're puking energy at the continued weakness in oil, they're puking junk debt because oil again, and thus they're buying downside protection becuase of the volatility, and they're puking XIV whose position is half of the near futures' open interest, and thus we get this big wobble.

Meanwhile for us in Canada, this is still just a minor breakdown in US equities and nothing really worth selling.

I scanned through the article and emailed Mr. Frisby back with the following:

Yeah this is old news mate, Modi and Rajan have been on about that crap for the past year.

Try telling a peasant farmer in Uttar Pradesh that his 15 grams of physical gold will do better for him if he puts it in a "bank". These people are medieval and don't believe in 1s and 0s, they make Ron Paul look like a Marxist Keynesian gay rights activist.

They also remember history - both the 2500 years of physical gold accumulation from exports, and the last 60 years of government mismanagement. India's a whole other world, man, and I'd rather learn about this stuff from an Indian than from some white-ass blogger.

And India doesn't care about gold imports now that the price of oil is crashing. Their current account is going to be beautiful this year. Rajan's big goal was to monetarize & hypothecate gold holdings, to provide a local source of metal for jewelry manufacturers, to fix the current account deficit: he shouldn't care now, and anyway over the long term that will just move gold into more sticky assets - from bullion into jewelry.

An idea was floated last year of letting Indians put their gold in a bank directly, and earn interest on the gold that would be paid as more physical gold. (Does that sound weird to you? Well, it makes sense from an Indian peasant's perspective.) But the interest offered was a joke - 2-3% or so.

And even then, long term that would *increase* demand for gold: practically, it means Indian banks would have to add to (paper at least) gold holdings by 2-3% a year to cover interest; and economically it means gold suddenly becomes an interest-bearing investment, which should increase demand.

Imagine how many rich white-ass honkies would ship their Swiss gold to India to earn 2% interest. Rajan would turn the world upside-down by making gold an interest-bearing security.

The guy [on the blog] is right though, progressive Indians need to see a positive real interest rate to participate in modern banking. Oh and they need to see a banking system that they can trust.

The cashless economy bit is good though - that already exists in Africa, people keep money on their cellphone. But good luck with India ever implementing anything as successfully as sub-Saharan Africa - as Piketty notes, India's per capita productivity today is only equal to Africa's. Let that sink in.

Everyone seems to think Modi's just going to wave the Holy Handbag of Margaret Thatcher and everything will be fine. But even Gandhi couldn't fix India and he was a demigod. Modi just looks good to Whitey because he speaks the neocon language.

In short, it's important to remember several things:

1) Reading the news will tell you when it's old news.
2) Old news is always already priced in.
3) Don't believe anything that an Indian politician says, especially when he's repeated it for the past 6 months without doing anything.
4) Don't believe anything a white-ass honky tells you about India.
5) India is this whole other country, unless you've seen it you have no clue (and I haven't seen it so yeah I have no clue either, but at least I know what I don't know).

Now let me show you something neat. Compare the weekly chart above with this one below:

Since November 2014, gold's been going up for the rest of the world while Americans have been happily shorting the apparent multi-year USD$1200 support breakdown.

I like that because it might mean there's an opportunity to be on the other side of the boat to Wall Street Whitey. That might turn out to be an interesting longer-term setup.

Then again, maybe it'll make sense forever for Americans to stay long USD/short gold. Certainly long-USD hasn't proven itself to be played out yet, has it? Hell, maybe that trade can keep going for years - we haven't seen copper or EMs fall to pieces yet.

Then again then again, if the rest of the world goes long gold because of chart #2, that might print a longer false breakdown on chart #3, and American traders who follow charts might decide to get less short gold, and thus you get a nice positive feedback upwards.

We'll see. Not making predictions, just saying this is an interesting inflection point and I want to see what happens with this over the next few months.

Sunday, January 4, 2015

I would just like to point out that yes, indeed, mainstream economists do know that GDP reports are lagging indicators. And they do also know about coincident and leading indicators, and they do indeed watch those.

In fact, the terms "lagging indicator", "coincident indicator" and "leading indicator" were invented by economists, and not by bloggers.

We have to get back to micromanaging markets, what with the US Santa rally stumbling and gold and the miners supposedly nearing takeoff. So, let's get back to the news:

New Deal Demoncrat - weekly indicators. The US is still fine, and the EU is still in a depression. As Krugman notes, this was the great double-blind study that proved Keynesian stimulus successful and austerian sadomonetarism a dismal failure.

Brett Steenbarger - making sense of a weak start to the new year. The past few days have seen massive program selling. He thinks we've seen the peak for this past market thrust. I'd reply that maybe this is a calendar-specific, rotation-oriented drop, possibly exacerbated by oil market turmoil: then again, I could be wrong, and Steenbarger seems smarter than me.

CNBC - Rosie on the permabears in the lunatic fringe. People congratulated Dave on switching to bullish when the evidence could no longer be ignored; I, however, think he's still an idiot for not realizing that the permabears he's talking about (who he used to hang out with) are mostly Russian KGB-funded propagandists who are paid to sow FUD among Pooty-poot's enemies. So even now, Rosie is right for the wrong reason, and that's not a good person to listen to.